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Also known as a GIC, a guaranteed investment contract is a legally binding agreement that is most commonly employed with investment opportunities involving insurance companies. Fulfilling a function that is somewhat like that of a certificate of deposit issued by a commercial bank, the guaranteed investment contract commits the issuer to repay the investor both the principal amount invested, plus interest according to the interest rate structure noted in the terms and conditions. This type of guaranteed agreement may carry a fixed rate of interest, or specify some type of process that is used in the event that a variable or floating interest rate is used.
The guaranteed investment contract is also somewhat like a bond issue, in that the terms of the agreement include a maturity date. In most cases, there are no disbursements from the contract during its life. Instead, the investor receives both the principal investment and any accrued interest at the time of maturity. There are examples of this type of contract that do provide periodic disbursements of the interest throughout the life of the contract, but these are somewhat less common.
One of the benefits of a guaranteed investment contract is that the degree of risk is no more than that of a certificate of deposit issued by a bank, while offering a higher return. This benefit makes the contract an ideal choice for anyone who prefers more conservative forms of investing, but wants to generate the best return possible. The stability of this type of investment instrument also makes it a popular option with different retirement plans, especially 401(k) plans. When employers offer retirement plans that include options regarding how the funds are invested on behalf of the employee, it is not unusual for a guaranteed investment contract to be included alongside options such as money market funds.
As with any type of investment opportunity, it is important to understand the exact nature of the guaranteed investment contract under consideration. This includes identifying whether the contract comes with a fixed or floating rate of interest, what is required in the way of a minimum principal, and the duration of the contract. Investors should also consider how the interest payments are distributed, and make sure the process is to their liking. If anything in the contract seems confusing or is not readily grasped by the investor, it is important to consult professionals who can explain what is mean by the clause or provision that the investor is having trouble understanding.
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